Market so far buying merits of Randgold, Barrick marriage despite cool reception among analysts

INVESTORS seem to be buying the argument presented to them by Barrick Gold executive chairman, John Thornton and Mark Bristow, CEO of Randgold Resources (mostly Bristow on the evidence of two conference calls and a lunch at the Denver Gold Show) that a merger of the two firms will be accretive, over time.

At least for now. Two days after news first crept into the market that Randgold Resources and Barrick Gold were preparing to unveil a merger, the shares of each company are up 11% and 10% respectively. This is despite some withering excoriation by analysts.

Stating this was “a bad deal for Randgold shareholders”, Standard Bank analyst, Adrian Hammond, said Randgold had achieved its success by means of slow organic growth where the focus has been on exploration, rather than size.

“Combining its assets with a much larger suite that requires restructuring will fundamentally challenge the Randgold way and premium,” he said. “As it stands, we think this deal is really about throwing a life-line to Barrick combined with an exit strategy for senior management of Randgold”.

“Our first take is that it is difficult to see the immediate value proposition for RRS [Randgold] shareholders,” said Luke Nelson, an analyst for JP Morgan Cazenove in a note produced before Thornton and Bristow has presented the investment thesis.

In common with both analyses, were observations that the merger’s nil premium structure did not do justice to Randgold’s higher rating whilst synergies between the mines of both companies were limited. Randgold’s balance sheet, which is net cash of about $600m, is in far better shape than Barrick’s $4.2bn net debt position, notwithstanding recent leveraging.

Randgold was “… reaching the pinnacle of its ability to return cash to shareholders which we think will now be used to fund Barrick’s project pipeline and balance sheet,” said Hammond. At 6%, Randgold’s dividend yield is better than Barrick’s 1%, and even its investment criteria of 20% IRR is higher than Barrick’s 15%. The upshot is that Barrick Group, as the new company will be called provided it wins the requisite 75% shareholder support of both companies, will be no more than a diluted version of Randgold.

Bristow has acknowledged that the $4.2bn net debt would have to be addressed at Barrick although he stopped short of saying it should be wiped out, which was his preference for years at Randgold. He also acknowledged Barrick’s leading open cast mining skills that may be introduced at some Randgold mines while the latter has underground experience that could be brought to bear if Barrick proceeds with expansion at its US-based operations.

In the end, Bristow is hoping the market will accept his track-record for operational excellence at face value; that in his hands, the combination of the two companies really is a new start. He could barely contain his contempt for sell-side analyses though:

“The industry is held to ransom by investors, analysts and opinion-makers because they don’t have the opportunity to invest in something over the long-term,” he said when one analyst challenged him on whether the merger provided any short-term benefits to shareholders in his company. “They manage their portfolios on a quarterly basis,” he said.

As good as the deal is for Barrick, according to analysts, Barrick board members still took “many hours” to persuade, according to Thornton. In a JP Morgan Cazenove note on Barrick, penned by John Bridges, the coup de gras was a visit to the Kibali mine in the Democratic Republic of Congo, jointly operated by Randgold and AngloGold Ashanti. Only then, says Bridges, were the Barrick board won over.

His take, as with Bristow, is that the merger took more than two years to reach even this point of gestation suggesting, by implication, that the progress of the merger will be marked in years, not days or months.